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Property Investment Appraisal

Author

Listed:
  • Adams, A.T.
  • Booth, P.M.
  • MacGregor, B.D.

Abstract

This paper considers the application of discounted cash flow (DCF) techniques to the analysis of the property investment market. The traditional method of property valuation is briefly outlined and its shortcomings highlighted. An alternative DCF procedure is derived to calculate the present value of a property investment. This method will be familiar to actuaries, but is not always used in property disciplines. The sensitivities of this formulation to changes in the force of real interest, force of real rental growth and force of inflation are derived. It is suggested how these formulae may be used for property investment appraisal and risk analysis. We conclude that DCF offers a more flexible and accurate means of estimating the value of a property, and that property valuers, financial economists and actuaries should work jointly to develop practical DCF methods. However, so long as traditional methods of valuation prevail, a rational investor must use both methods to identify mispriced property assets. There have been few property contributions to the actuarial literature in the United Kingdom; this paper is intended to build on the few previous papers and suggests directions for future work.

Suggested Citation

  • Adams, A.T. & Booth, P.M. & MacGregor, B.D., 1999. "Property Investment Appraisal," British Actuarial Journal, Cambridge University Press, vol. 5(5), pages 955-982, December.
    • Handle: RePEc:cup:bracjl:v:5:y:1999:i:05:p:955-982_00
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    Cited by:

    1. Ataguba Joseph Obaje, 2021. "Synthesis of Short-Cut DCF Appraisal and Spreadsheet Iteration of Freehold Rental Growth Rates Across Specific Valuation Epochs," Real Estate Management and Valuation, Sciendo, vol. 29(2), pages 52-70, June.
    2. Copiello, Sergio, 2015. "Achieving affordable housing through energy efficiency strategy," Energy Policy, Elsevier, vol. 85(C), pages 288-298.
    3. Michael Heinrich & Thomas Schreck, 2018. "The Interest Rate Sensitivity of Institutional Real Estate Investments," LARES lares_2018_paper_112-hein, Latin American Real Estate Society (LARES).
    4. Booth, Philip & Walsh, Duncan, 2001. "An option pricing approach to valuing upward only rent review properties with multiple reviews," Insurance: Mathematics and Economics, Elsevier, vol. 28(2), pages 151-171, April.
    5. Anna Olkiewicz & Radosław Wolniak & Marcin Olkiewicz & Martyna Szymczewska, 2020. "The Impact of Professional and Economic Activity on the Development of Apartments Market," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 404-418.

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